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The Underground Economy in Canada

  • Tedds, Lindsay

There is considerable agreement internationally about the factors that determine the relative size of the underground economy (tax burden, regulation, enforcement, confidence in government, labour force characteristics, and morality) and that evidence of underground activity will be captured in several economic indicators (GDP, currency in circulation, and consumption rates). Until recently, however, the methods that have been employed to measure the underground economy focused on only a few causal factors, one indicator, and only produced an estimate for one particular point in time. There exists a modeling technique that treats the underground economy as an unobservable or latent variable and incorporates multiple indicator and multiple causal (MIMIC) variables. The MIMIC model uses information contained within relevant indicator and causal variables to estimate a time-path of the size of the hidden economy. In applying this estimation technique to Canada data, my results indicate that, the underground economy in Canada grew steadily relative to measured GDP over the period 1976 to 2001. The value of the broadly defined underground economy grew from about 7.5% of GDP in 1976 to about 15.3% in 2001. In real (1997) dollar terms, it increased from about $38 billion to $159 billion.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4229.

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Date of creation: 2005
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Handle: RePEc:pra:mprapa:4229
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  1. Friedrich Schneider & Christopher Bajada, 2003. "The Size and Development of the Shadow Economies in the Asia-Pacific," Economics working papers 2003-01, Department of Economics, Johannes Kepler University Linz, Austria.
  2. Rolf Mirus & Roger S. Smith, 1981. "Canada's Irregular Economy," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 444-453, Summer.
  3. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53.
  4. Andrew Dilnot & C. N. Miller, 1981. "What do we know about the black economy?," Fiscal Studies, Institute for Fiscal Studies, vol. 2(1), pages 58-73, March.
  5. David E. A. Giles, 1998. "The Hidden Economy and the Tax-Gap in New Zealand: A Latent Variable Analysis," Econometrics Working Papers 9807, Department of Economics, University of Victoria.
  6. Pissarides, Christopher A. & Weber, Guglielmo, 1989. "An expenditure-based estimate of Britain's black economy," Journal of Public Economics, Elsevier, vol. 39(1), pages 17-32, June.
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